The Turnbull government wants "dramatic reductions" in private health insurance price rises over the next three years, with a major new reform package set to make deep cuts to the medical device sector and entice more young people into cover.
Health Minister Greg Hunt's changes will also aim to slash mental health service waiting lists for private patients, and finally require insurers to offer a simplified three-tier policy system that will make it easier for people to compare, choose and understand their coverage.
Warning of a "catastrophe" if the government does not act to stop the private health insurance exodus, Mr Hunt says this year's 4.8 per cent average premium price increase was too high and said his plan will bring future increases as close as possible to the general inflation rate of two per cent.
"There are always some cost differences between the general sector and the health sector," Mr Hunt told Fairfax Media in an exclusive interview. "But I want to bring it down and I think we can bring it down quite dramatically from where it's been."
However Mr Hunt is tight-lipped on whether the package, to be announced within weeks, will heed doctors' calls to crack down on so-called "junk policies", or remove taxpayer support for natural therapies such as homeopathy and aromatherapy.
Describing private health insurance as "an article of faith" for the Coalition – despite widespread public anger over relentless price rises and diminishing cover – Mr Hunt says the package will be designed to help the industry, rather than hit its profitability or increase regulation.
With about 10,000 people currently ditching their insurance every month, Mr Hunt says a failure to act now could result in disaster: a 1990s-style industry collapse that would strain the entire health system.
"The domino effect here is a collapse in private health would lead to major damage to the private hospitals, which would lead to catastrophic wait times in public hospitals," the health minister said.
Mr Hunt confirmed the government is close to finalising a deal with the medical device sector that will force it to cut its prices for private patients, saying there are "significant savings" to be achieved. While he would not nominate a number, the cut is likely to range between $300 million and $1 billion.
"We're working towards an agreement," Mr Hunt said. "It's hard, we're asking them to forego profits. But all we're saying is, what is it reasonable for the Commonwealth to be paying? They have largely accepted that something has to happen and now we're negotiating over terms."
Private Healthcare Australia's Rachel David says every $200 million cut from the medical device sector's Prostheses List would translate into a one per cent cut in premium price increases. Mr Hunt agrees that is a "good guide" as to what to expect.
The simplification measures in the package will include new gold, silver and bronze tiers to streamline the estimated 40,000 products currently on the market.
Fairfax Media understands there could also be a fourth category that would apply to products that do not meet certain coverage standards.
Another major focus of the package will be attracting and keeping young people in health insurance to dilute insurers' risk. Current measures such as the Medicare levy surcharge and lifetime health cover are not doing enough to attract healthy under-30s.
Mr Hunt believes slashing mental health service waiting lists will be key.
"We want to make young people a focus so they elect to enter into private health," he said. "And the ability to get earlier and better access to mental health services through private health could be the single-biggest driver for young people to pick it up."
But Mr Hunt's focus on attracting young people could mean he is less likely to go after junk policies, which have so many exclusions they provide poor value for taxpayers who subsidise them through the $6 billion rebate. Many 20-something people sign up to these policies to avoid the loading that will be added if they wait until after 30, with the intention of upgrading later.
Mr Hunt may also be less inclined to act on natural therapies, which are covered by health funds – and therefore also subsidised by taxpayers – even though they are not clinically proven. These therapies include yoga and pilates, which insurers insist help attract young people to funds.
Mr Hunt said these elements was being "studied very closely", but there was a "bit of a way to go".
The minister also intends to tackle cost-shifting, in which public hospitals bill health insurers for the cost of treating members who would otherwise not be charged. But he says that will be addressed next year in a subsequent set of changes to be delivered in consultation with the states.
The initial package will be announced next month at the latest, before the country's 37 insurers submit their applications for next year's price increases. Their deadline is November 10, with increases announced in February and implemented in April.
This year's premium price rise of 4.84 per cent was the lowest in a decade but still more than double the inflation rate.